The prospects of monetary easing in the mid-quarter policy review on June 18 brightened on Friday. Apart from falling commodity prices and an economic slowdown (on Friday’s Brent crude price fall and yesterday’s GDP growth figures were the most immediate reasons), the market took comfort from Reserve Bank of India (RBI) Deputy Governor Subir Gokarn’s comments in Kochi on Friday.

Gokarn said though the slowdown had been in line with the RBI’s expectations, slowing GDP growth and the oil price fall provided more room on rates. He also said the growth slowdown was accompanied by a fall in core inflation and reiterated the need for a rate reversal to support growth.

In May, the RBI reduced interest rates for the first time in three years, but had said the scope to cut rates further was limited, as inflation remained more than seven per cent. The recent fall in core inflation has, however, provided some relief to the central bank. The depreciating rupee, on the other hand, is exerting pressure on inflation as the country imports over 80 per cent of its crude oil requirement.

Market players are living on hope. “We expect a rate cut of 25-50 bps (basis points) in the mid-quarter policy review, especially after the announcement of economic data on Thursday,” said Jayesh Mehta, managing director and country treasurer, Bank of America. After the release of fourth-quarter GDP data, markets have priced in a policy rate cut of 25 bps, which was reflected in the softening of bond yields. The yields on the 10-year benchmark government bond have fallen by 15 bps since the close on Wednesday.

On Friday, the yields closed at 8.34 per cent.

“We believe a 25-bp repo rate cut to 7.75 per cent on June 18 is now more likely than before. Indeed, we see a risk of more rate cuts going forward as the RBI’s bias could shift more in favour of boosting growth,” said Anubhuti Sahay and Nagraj Kulkarni, economists at Standard Chartered Bank. The economists lowered the FY13 growth outlook significantly to 6.2 per cent from 7.1 per cent after the January-March GDP numbers were announced.

Commenting on the recent oil price rise, Gokarn, who looks after the monetary policy department in the central bank, said the impact of the petrol price increase on inflation was 10-15 bps.

The deputy governor reiterated the option of a special dollar window for oil marketing companies was still open. Such a facility will provide some support to the weakening rupee, the worst performing Asian currency in the current financial year.